Having signaled a rate-hike 'no matter what', The Fed delivered 25bps (as the market 100% expected), cut its reference to "rate below long-run levels for some time," and signaled its expectations for two more rate-hikes in 2018.
Key takeaways from FOMC decision:
- Fed raises rates as expected, 8-0 vote
- In the latest dots, the rate hike path steepens a little this year, still aiming at 3.4% end-2020; longer-run neutral rate still seen at 2.9%
- FOMC statement says economy growing at "solid rate,'' job gains have been "strong,'' consumer spending has picked up and investment continued to grow "strongly''
- The Fed removed the low inflation line: "Market-based measures of inflation compensation remain low"
- Language about the economy upgraded, line about rates remaining below long-run levels "for some time'' was removed
- The sentence got tweaked: "The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.''
- IOER rate raised 20bps to 1.95% as of June 14; discount rate goes up to 2.5%
The median 'dot' for the end of 2018 has been 2.125% since Dec 2016 and today's dot plot shifted higher to 2.375% confirming The Fed's expectation for two more rate hikes this year, while the 2019 dot rose from 2.9% to 3.1%, suggesting the hiking carries through.
Here is the full breakdown of the median dots:
- 2018 is 2.375% vs 2.125% in March;
- 2019 is 3.125% vs 2.875% in March.
- 2020 and longer-run medians are unchanged at 3.375% and 2.875% respectively
So the 2018 and 2019 rate expectations are higher as the most dovish participants raise their dots...
Looking at the projections, we see further optimism, with unemployment forecasts in 2018, 2019 and 2020 declining to 3.6%, 3.5% and 3.5%, while Inflation finally rises from 1.9 and 2.0% in 2019 and 2020 to 2.1% and 2.1%. In other words the economy is expected to overheat modestly for 3 years!
The Fed also expects Fed Funds rates to rise from 2.1% to 2.4% in end 2018, and from 2.9% to 3.1% in 2019. The 2020 rate remains the same at 3.4%, and then fades back to 2.9% for the longer run.
The bias is clearly hawkish.
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Ahead of today's FOMC decision, the market was pricing in 3.8 rate hikes in 2018 (that would be 1.8 more hikes after today's hike)...
But the market is also pricing a notable slowdown in the trajectory of rate-hikes next year...
Since The Fed last hiked rates, in March, Financial Conditions have eased...
The Dollar has soared since the last Fed rate hike, EM FX has collapsed, Treasuries are unchanged and stocks are marginally higher...
And perhaps most critically, the US yield curve has collapsed since The Fed hiked in March...
While a 25bps rate-hike is 100% baked into the cake - well why wouldn't it be, we're in the middle of a "global synchronous recovery" right? Oh wait!
And so don't show this chart to The Fed...
Because remember, they're raising rate for the right reason.
Finally for those wondering if the Fed raised the IOER by only 20bps as it hinted in the last minutes, the answer is yes: Fed governors voted unanimously to raise interest on excess reserves (IOER) rate to 1.95%, which is intended to foster trading in the fed funds market at rates “well within the FOMC’s target range,” according to the statement released Wednesday. Meanwhile the rate on the Fed’s RRP facility increased to 1.75% from 1.50%
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Full Redline below: